The central board of the Reserve Bank of India (RBI) decided to transfer a surplus of Rs 1.76 lakh crore to the government-its highest transfer ever-sparking a fierce debate on August 26. The government was, it must be noted, acting on the recommendations of a committee chaired by former RBI governor Bimal Jalan, on capital transfer.
The surplus from the central bank comprised two components-Rs 1.23 lakh crore of surplus for the year 2018-19 and an additional Rs 52,637 crore of excess provisions that were made available as per the revised economic capital framework recommended by the Bimal Jalan committee. Of the Rs 1.23 lakh crore, the RBI has already transferred Rs 28,000 crore to the government in the previous fiscal, which will reflect in RBI's upcoming annual report. The transfer is also almost double the Rs 90,000 crore that was targeted in the Union budget presented by finance minister Nirmala Sitharaman in July.
The issue of transferring the RBI's reserves to the government has been a hot topic of debate for the past few months and emerged as a major bone of contention between previous RBI governor Urjit Patel and the government. In December last year, the RBI set up the Bimal Jalan committee to examine what level of reserves the apex bank should actually maintain, and how much it could transfer to the government.
Coming just days after a financial stimulus package was announced by Sitharaman-in which she withdrew the controversial surcharge on capital gains for domestic and foreign investors, infused Rs 70,000 crore into public sector banks for their recapitalisation, promised faster refunds of the Goods and Services Tax and announced a range of sops to the troubled auto sector-the RBI's move was seen as one that would place more money in the government's hands to tide over the economic crisis.
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The Opposition Congress criticized the government for "stealing from the RBI", saying that the government was "clueless about how to solve their self-created economic disaster".
However, Sitharaman dismissed the criticism as being "outlandish". The All India Bank Employees Association accused the government of "dismantling one more autonomous institution" and said the "government wants the [RBI's] surplus to meet a deficit in the budget". Former RBI governors Y.V. Reddy and D. Subbarao had publicly opposed such transfers, as did former deputy governor Viral Acharya, who argued such a move could be "catastrophic".
SETTING A PRECEDENT
To be sure, the RBI has often transferred surpluses to the government over the years. For instance, in 2017-18, it transferred Rs 50,000 crore of surplus to the government, including an interim dividend. In 2016-17, the transfer was to the tune of Rs 30,659 crore.
As per sources, this time around, not only is the dividend payment the largest ever disbursed, but the recommendations of the Bimal Jalan Committee have also set clear guidelines for the future, ending the central bank's discretion when it comes to deciding surplus transfers to the government. "In the past, whatever profits were being earned by the central bank were transferred either in part or in full to the government of India.
The surplus reflects the revenue that the RBI has earned on its assets. In 2017-18, the size of the RBI's balance sheet stood at Rs 36.2 lakh crore. The RBI has two types of reserves. One is the currency and gold revaluation account, representing the value of gold and foreign currency that the central bank holds on behalf of the country-this stood at Rs 6.9 lakh crore in 2017-18.
The other is the contingency fund, a specific provision meant to act as a buffer against unexpected exigencies-it stood at Rs 2.32 lakh crore in 2017-18. Whatever amount is left with the RBI after meeting its needs is transferred to the government. For 2018-19, the RBI had a record surplus as the central bank intervened in the forex market and the money markets, selling dollars at a big profit in the former and conducting open market operations in the latter. So, that explains the source of the Rs 1.23 lakh crore transfer to the government.
Now for the Rs 52,637 crore, an amount arrived at after taking into consideration the economic capital framework. As per the framework, the RBI has to maintain a contingent risk buffer that is between 5.5 percent and 6.5 percent of its balance sheet. Critics have questioned the RBI board-chaired by governor Shaktikanta Das-on its decision to maintain the contingent risk buffer at 5.5 percent, the lower end of the recommended range (which allows the maximum possible transfer to the government).
FILLING THE REVENUE GAP
Another major question has to do with what the money will be used for. The amount could either be used to provide a fiscal stimulus to the economy which is in the grip of a slowdown-or to reduce off-balance-sheet borrowings, or meet an expected shortfall in revenue collections. In the Union budget, the government had presented an optimistic scenario of raising Rs 4.76 lakh crore in additional resources to meet budget expenses. However, since there is a clear slowdown ahead, this revenue target may not be met, in which case the surplus from the RBI would be used to bridge the shortfall.
However, if the budgetary targets are met in the normal course of activity, the government will use the amount as a stimulus. While this is surely a big gain for the government, it will have a tough time justifying the transfer of such a big amount into its kitty.